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Thoughts about economic and business issues by and for the NYU Stern community -- and others with similar interests. The content reflects the views of individual NYU faculty but not necessarily those of NYU. Comments and suggestions welcome. Special thanks to our tech consultant, MBA alum Tim Reilly.

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Government and the public good

May 23, 2013

Economists are trained to have a technocratic perspective: to think about how the world would work if we were running it in the public interest. As we gain experience, many of us are disappointed to learn that government and public interest are only loosely connected, and that the instruments of government policy — anti-trust, financial regulation, monetary policy — are crude ones. Did the Microsoft anti-trust case make things better for consumers? Will Dodd-Frank make the world safer? We’ve learned to be modest about what we can do — and, as Churchill might have said, we have a lot to be modest about.

That’s the reasonable version, but in the hands of an expert like Deirdre McCloskey, a rant is a lot more entertaining. From her post, lightly edited for continuity:

The High-Liberal political philosophers … rely on a factual story which they take to be so obvious as to not require defense. The story is: Modern life is complicated, so we need government to regulate. Since markets fail frequently the government should step in to fix them. Antitrust works. Businesses will exploit workers if government regulation and union contracts do not intervene. Unions got us the 40-hour week. Poor people are better off chiefly because of big government and unions.

But no. The master narrative of High Liberalism is mistaken factually. Externalities do not imply that a government can do better. How do I know this? The experiments of the 19th and 20th centuries tell me so. American Progressive regulation and its European anticipations protected monopolies of transportation like railways and protected monopolies of retailing like High-Street shops and protected monopolies of professional services like medicine, not the consumers. Unions raised wages for plumbers and auto workers but reduced wages for the non-unionized. Minimum wages protected union jobs but made the poor unemployable. Building codes sometimes kept buildings from falling or burning down but always gave steady work to well-connected carpenters and electricians and made housing more expensive for the poor. Zoning and planning permission has protected rich landlords rather than helping the poor.

If you missed the point, here are examples from Montreal and Bogota. I wouldn’t say government can’t help, but history tells us to keep our goals modest.